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Macroeconomic Implications of Modeling the Internal Revenue Code in a Heterogeneous-Agent Framework

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  • Moore, Rachel
  • Pecoraro, Brandon

Abstract

Fiscal policy analysis in heterogeneous-agent models typically involves the use of smooth tax functions to approximate present tax law and proposed reforms. We argue that the tax detail omitted under this conventional approach has macroeconomic implications relevant for policy analysis. In this paper, we develop an alternative approach by embedding an internal tax calculator into a large-scale overlapping generations model that explicitly models key provisions in the Internal Revenue Code applied to labor income. While both approaches generate similar policy-induced patterns of economic activity, we find that the similarities mask differences in key economic aggregates and welfare due to variation in the underlying distribution of household labor supply responses. Absent sufficient tax detail, analysis of specific policy changes - particularly those involving large, discrete effects on a relatively small group of households - using heterogeneous-agent models can be unreliable.

Suggested Citation

  • Moore, Rachel & Pecoraro, Brandon, 2018. "Macroeconomic Implications of Modeling the Internal Revenue Code in a Heterogeneous-Agent Framework," MPRA Paper 87240, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:87240
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    File URL: https://mpra.ub.uni-muenchen.de/87240/1/Moore%2C%2BPecoraro%2B-%2BModeling%2Bthe%2BIRC.pdf
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    File URL: https://mpra.ub.uni-muenchen.de/88865/9/MPRA_paper_88865.pdf
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    References listed on IDEAS

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    1. Macroeconomic Implications of Modeling the Internal Revenue Code in a Heterogeneous-Agent Framework
      by Christian Zimmermann in NEP-DGE blog on 2018-10-10 14:52:57

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    Cited by:

    1. Rachel, Moore & Pecoraro, Brandon, 2018. "Dynamic Scoring: An Assessment of Fiscal Closing Assumptions," MPRA Paper 89325, University Library of Munich, Germany.

    More about this item

    Keywords

    dynamic scoring; tax policy; tax functions and calculators; heterogeneous agents;

    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General

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